Dollar hits 2023 high on US interest rate forecasts
Dollar rose in European trade on Tuesday against a basket of major rivals, extending gains for the third straight session, and scaling 2023 highs amid expectations of another US interest rate hike this year.
Analysts also expect the Federal Reserve to maintain high interest rates throughout 2024.
The Index
The dollar index rose 0.25% to 106.20, the highest since November 2022, after rising 0.35% on Monday, the second profit in a row as US treasury yields spiked.
US Yields
US 10-year treasury yields rose 0.6% on Tuesday, extending gains for the second straight session and scaling a 16-year high at 4.564%.
Such gains came after the Federal Reserve issues official expectations that clearly pave the way for another interest rate hike this year.
The Fed also expects two interest rate cuts in 2024, much lower than previously expected.
Fed Remarks
Several Fed officials hinted last Friday at several more interest rate hikes, and said the battle with inflation isn't over yet.
US Rates
Current pricing for a 0.25% interest rate hike in November stands at 20%, which is still rather low.
However, pricing for a 0.25% Fed interest rate hike stands at a higher 40%.
Now investors await important US personal spending data to measure inflation and judge the likely path ahead for US policies.
Reasons that bolster the case for an additional US rate hike.. what are they?
Amid sharp volatility in dollar's pricing and US treasury yields, markets are speculating about an additional US interest rate hike before the year end.
Thus investors are now focused on analysing fresh data that might shed light on such a prospect occurring in November or December.
Here we're trying to enumerate the likely factors and reasons that might push the Federal Reserve to raise interest rates once more.
Bullish Remarks
The Federal Reserve released its quarterly forecasts report last week, crucial for gauging the path ahead for interest rates and policies.
The forecasts were far more aggressive that expected, especially with growth, inflation, and interest rates.
The Fed raised the US growth forecast in 2023 from 1% to 2.1%, and for 2024 from 1.5% to 1.5%.
Such an uptick in growth forecasts reflect a positive view for economic activity in the country despite the higher US interest rates.
The Fed also raised inflation forecasts in 2023 from 3.2% to 3.3%, while holding the 2024 forecast at 2.5%.
Such forecasts delineate the Fed's view on stubborn inflation rates in the foreseeable future through 2025, thus necessitating higher interest rates for a longer duration.
The Fed also maintained its forecasts for 2023 interest rates at 5.75%, indicating another US interest rate hike in November or December.
The Fed also expected only 50 basis points worth of rate cuts in 2025 and 2025, down from 100 basis points in previous forecasts.
US Inflation
Recent US data showed consumer prices rose past estimates in August, while producer prices and US retail sales also rose past estimates last month.
Such data indicates that inflation remains stubborn and raises the pressure on Fed policymakers.
Global Oil Prices
The recent surge in global oil prices to 10-month highs on track for $100 a barrel also boosted inflation rates worldwide and renewed concerns of an extended battle with inflation.
US Economy
Recent US data showcased the flexibility and resilience of the US economy, in turn giving the Fed some leeway in tightening monetary policies even further.
Powell
Fed Chair Jerome Powell said following last week's meeting that controlling inflation and bringing it down to 2% is a long-term process, and another interest rate hike won't impact the total economy much and could help efforts to contain inflation.
Gold declines to two-week trough as US yields power up
Gold prices fell in European trade for the second session, plumbing a two-week trough and almost testing the support of $1,900 as the dollar spikes.
Another surge in US treasury yields also hurt gold prices as analysts expect the Fed to raise interest rates once more this year.
The Federal Reserve also officially expects to hold interest rates high for most of 2024 and 2025 to control inflation.
Gold Prices
Gold prices fell 0.3% to $1,909 an ounce, the lowest since September 14, with a session-high at $1,916, after losing 0.5% on Monday, the fourth loss in five days as the dollar strengthens.
The Dollar
The dollar index rose 0.25% on Tuesday, extending gains for the third session in a row while hitting a 10-month high at 106.20 against a basket of major rivals.
A stronger dollar makes dollar-denominated gold futures costlier to holders of other currencies.
US Treasury Yields
US 10-year treasury yields rose 0.6% on Tuesday, extending gains for the second straight session and scaling a 16-year high at 4.564%.
Such gains came after the Federal Reserve issues official expectations that clearly pave the way for another interest rate hike this year.
The Fed also expects two interest rate cuts in 2024, much lower than previously expected.
Fed Remarks
Several Fed officials hinted last Friday at several more interest rate hikes, and said the battle with inflation isn't over yet.
US Rates
Current pricing for a 0.25% interest rate hike in November stands at 20%, which is still rather low.
However, pricing for a 0.25% Fed interest rate hike stands at a higher 40%.
Now investors await important US personal spending data to measure inflation and judge the likely path ahead for US policies.
The SPDR
Gold holdings at the SPDR Gold Trust fell 0.87 tonnes yesterday, the second drop to a total of 876.52 tonnes, the lowest since January 2020.
Euro sharpens decline to six-month trough amid concerns about rate gap
Euro fell in European trade on Tuesday on track for the sixth straight loss against dollar, plumbing a six-month trough amid concerns of a widening interest rate gap in favor of the US.
The ECB announced that interest rates have reached restrictive levels, while the Federal Reserve hinted at another interest rate hike this year.
EUR/USD fell 0.2% today to 1.0570, the lowest since March, with a session-high at 1.0596, after losing 0.5% on Monday, the fifth loss in a row after ECB President Christine Lagarde's testimony ahead of Parliament, while US treasury yields spiked.
Lagarde said that recent economic indicators show weakness in the euro zone in the economy during the third quarter of the year.
Lagarde said that inflation in the euro zone is expected to decline further but will likely remain high for a long time.
Lagarde asserted that current interest rates will help achieve inflation targets in the medium term at 2%, with the ECB continuing to rely on new data to determine the path ahead.
Interest Rate Gap
The current interest gap is now holding at 100 basis points between the US and Europe, the lowest since May 2022, however it could rise once more to 125 basis points.
Most analysts expect the European Central Bank to hold interest rates unchanged this year.
However, the Fed is expected to raise interest rates by 25 basis points in November or December to hammer inflation home.
The Dollar
The dollar index rose 0.25% on Tuesday, the third profit in a row, hitting a ten-month high at 106.20 against a basket of major rivals.
US 10-year treasury yields rose 0.6% today to 16-year peak at 4.564%.
Such gains came after the Federal Reserve issues official expectations that clearly pave the way for another interest rate hike this year.
The Fed also expects two interest rate cuts in 2024, much lower than previously expected.